A changing environment
The commercial property insurance industry has sustained a number of catastrophic losses over the last several years. The “big three” hurricanes of 2017 – Harvey, Irma and Maria – resulted in one of the costliest Atlantic hurricane seasons on record. This was quickly followed in 2018 by the most destructive California wildfire season on record, and Hurricane Michael – the first Category 5 storm to hit the U.S. mainland since 1992. In 2019, Hurricane Dorian marked the strongest landfalling storm in the Atlantic Ocean on record.
These events are not isolated. Rather, they are part of a larger trend of increased frequency and intensity of weather events driven by a changing climate. This evolution of the natural environment has subsequent impact on the financial environment within the commercial insurance industry. In Aon’s Weather, Climate & Catastrophe Insight: 2019 Annual Report, the global insurance services firm reports that $232 billion in losses were sustained due to natural disasters, $71 billion of which were insured, and 51% of which were recorded in the United States.
What the insurance industry can do
The good news, according to Aon, is that a well-capitalized reinsurance industry was equipped to manage these losses. Over the last year, American Capital Assurance Corp (AmCap Insurance) has continued to communicate the impacts of a hardening reinsurance market, which has been driven in large part by these significant losses, as well as continued global population growth and other factors that increase risk exposure. Despite increases in reinsurance rates it is important for carriers to generously invest in reinsurance as it provides the resources to pay claims following a severe catastrophic loss.
While the insurance industry certainly plays a critical role helping to recoup weather-related losses, resilience begins much earlier upstream. Through the efforts of governments, communities, the commercial real estate industry, and even individual property owners, losses can be mitigated before they occur.
What evolving infrastructure can do
Part of adapting to a changing climate requires changing our approach to infrastructure (e.g., buildings, bridges and roads) at a global level – an undertaking that will require $94 trillion in spending according to the Global Infrastructure Hub. While the need to grow and evolve infrastructure is based on a number of factors, including global population and economic growth, as well as the need to meet sustainability goals, it also includes the need to take weather and climate changes into account. A relevant example of this is flooding risk, which represented the highest global economic losses in 2019 out of any singular peril per Aon’s report. In 2017, Hurricane Harvey delivered unprecedented rainfall to Houston over a very condensed time period; however what has been learned from this event is that civil and environmental engineering play a critical role in mitigating the impact of weather. In Houston’s case, significant encroachment on wetlands due to increased urban development hindered the region’s ability to absorb excess rainfall, exacerbating the flooding.
What the commercial real estate industry can do
While building for resilience is a vast and shared undertaking between governments, communities and private enterprise, the CCIM Institute highlights steps that the commercial real estate industry can take to mitigate risks and impacts. These include making smart investment and development choices, utilizing climate resilient building strategies such as building hardening, and leveraging incentives to improve energy efficiency as a means to reduce the negative impact of development on the climate.
What commercial property owners can do
As individuals, we all have the opportunity to make an impact. Commercial property owners can mitigate losses and practice resiliency on their own properties by:
— Implementing best practices that reduce the risk of property damage due to weather events and other hazards. Recently, AmCap Insurance published tips for protecting property during hail season and from hurricanes.
— Upgrading utilities or investing in auxiliary power sources to help mitigate losses due to business interruption.
— Having the right insurance policies in place to ensure adequate risk coverage. With a changing climate, property risks can become less predictable. Property owners should talk to their insurance agent about what insurance products may be prudent for them to invest in.